Wednesday, March 4, 2009

"We're not gonna get rid of anybody! We're gonna stick together, just like it used to be! When you side with a man, you stay with him! And if you can't do that, you're like some animal, you're finished! We're finished! All of us!"

— The Wild Bunch

Crack muckraking over at the Wall Street Journal this morning, detailing how the top 10 earners at Merrill Lynch pulled down $209 million in compensation last year while Mother Merrill soiled her undergarments to the tune of $27.6 billion. Citing "documents and interviews with people familiar with Merrill's compensation," the WSJ reveals a raft of details, dishing dirt and naming names with abandon.

It is amusing to speculate who spilled the beans to our intrepid reporters. While the article is laced throughout with (mostly) favorable tidbits concerning the business unit performance of many of the grandees spotlighted, the overall tone and content of the article is sure to get Joe Sixpack and his six-term Congressman's blood boiling. If New York Attorney General Andrew Cuomo's staff was not intimately involved in the leaks, then I am sure the scene at his office this morning was an interesting mixture of screaming and burst blood vessels that some finance rag got the story first and unbridled glee that pitchfork and torch sales across the country just shot through the roof. It would not be outlandish to consider the Merrill executives' bonus pool as the latest and largest campaign gift toward Mr. Cuomo's 2010 gubernatorial run.

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There is some effort made in the article, either by the Journal reporters themselves or their informants, to emphasize that these compensation decisions were not completely unhinged from Merrill's deteriorating financial condition at the end of 2008. For one thing, the article notes that a mere 11 employees were paid more than $10 million each in stock and cash last year, versus 28 lucky bastards who broke the ten-bar barrier during the halcyon days of 2007. Attention is also drawn to the fact that the stock portion of these players' compensation has taken it on the chin since it was awarded, although one would have to know the effective grant date and corresponding grant price to calculate just how much pain they have suffered in tandem with non-insider shareholders and the US taxpayer.

Two big hitters, the heads of rates and commodities at Merrill, pulled down relatively modest pay packages in the high teens, even though both their units made money. David Sobotka made $13 million, a mild drop from his 2007 comp, even though his unit wheeled almost $36 billion in small bills out onto the sidewalk and set them on fire with lighter fluid. Apparently the buck burning was not his fault, as we are led to believe the Executive Committee had already booked the ceremony before he arrived. I guess we can presume his bonus was a big thank-you kiss for not adding more shareholder wealth to the flames.

Poor Andrea Orcel had to make do with only $33.8 million, down 6% from 2007's $36 million, even though the article tells us the IB honcho personallytook credit for generated over half a billion dollars of investment banking revenue for the firm. This is almost comically tightfisted, as everyone knows that the other 578 Merrill bankers who helped originate and execute his deals could not possibly have delivered such a bounteous harvest without Andrea's personal and dedicated attention to every possible detail. The man must be a true force of nature, since he was paid a special $12 million bonus in 2007 for advising RBS and others on the acquisition of ABN Amro, a deal which involved so many competing parties and advisors that Merrill Lynch would have had to shutter all their European offices and disconnect their telephones in order not to get a role on the transaction. I guess Andrea answers his telephone in a uniquely persuasive manner.

I won't even get into a discussion about Thomas Montag or Peter Kraus1, who made $40 million and $30 million under contracts for five and three months' work, respectively, other than to say that Lloyd Blankfein should mail John Thain a big fruit basket for taking these yobbos off Goldman Sachs' hands. Canceling the unvested GS stock Thain bought out to get these guys to jump ship to Merrill must have added at least a penny a share to Goldman's earnings.

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The contrast between Merrill's largess to its senior executives during a year (and particularly a quarter) when the repo man was banging on the front door of its headquarters and the pay practices of a traditional investment banking partnership could not be more stark. At the latter, when the firm has a bad year, the partners pay the operating bills and their non-partner colleagues first, then they distribute whatever is left over among themselves. If a partner doesn't have enough cash to pay his bills, he draws from or borrows against his equity in the partnership and tells the wife she better put plans for a vacation home on Mustique on hold for a year or so. A partner who has a bang-up year when everyone else doesn't mans up, accepts perhaps a slightly larger equity stake in the partnership in recognition of his outperformance, and eats rice and beans with the rest of his colleagues. That's how it's done when you play with your own money.

But that's not how it worked at Merrill. Thain and his partners in crime were playing with other people's money, in this case Bank of America's, so they played by different rules. Anecdotal evidence and the Journal article itself indicates that lots and lots of Merrill bankers got whacked—and whacked hard—in terms of total pay last year (e.g., 17 fewer senior bankers and department heads breaching the $10 million mark), but the cabal at the top seem to have gotten off relatively unscathed. No wonder John Thain was rumored to have initially proposed a $40 million bonus for himself. After all, he couldn't let Montag, Orcel, and Kraus beat him in the moolah sweepstakes, could he?

This sort of every man for himself, winner-take-all philosophy makes a mockery of the idea that investment banks are team-based businesses. If the generals salve their wounded pride on the beach with Mai Tais and cigars while the troops get slaughtered and the shareholders get bankrupted, you have all the conditions necessary for a revolution. Most of the battered troops remaining in the industry will look at this self-serving behavior with disgust. Many will desert, never to return. One or two might even roll a fragmentation grenade into the Executive Committee meeting room during morning call. A few, of course, will grin with delight, convinced in their psychopathic little hearts that they, too, will be sitting on top of the greasy pole in a few years.

Shareholders and taxpayers will seethe with anger and offer themselves as eager acolytes to vengeful prosecutors and irresponsible demagogues alike. Trust and respect for investment bankers and businessmen in general will languish for a generation, with knock-on effects to the general economy that will do nobody any good. Taxes and regulations alike will smother innovation and enterprise, and investment banking itself will return to its somnolent roots as a backward refuge for the idiot sons of men of privilege.

Some may smile at this prospect, but I think it's a damn shame.

I hope those Mai Tais were worth it, boys.

1 Kraus is poster boy extraordinaire for the conventional wisdom that "Wall Street firms ... need to pay top dollar to big producers to keep them from jumping ship." Say, just how did paying Kraus 30 million clams prevent him from hopping to Alliance Bernstein three months after he joined the Thundering Herd? Inquiring minds want to know.